Student Loan Deferment: How It Affects Your Future

Forbearance operates like deferment in that you can pause loan payments, but you will always be responsible for accrued interest.

Look into income-driven repayments and student loan forgiveness before considering deferment or forbearance, as these options will be easier on your finances in the long run.

If you’re a current or former college student, there’s a big chance you have student loan debt. In 2017, the average student loan debt was $28,650, with the current nationwide total coming in at $1.5 trillion.

Ideally you have a repayment plan in place and you’re paying your loan off without any problems. But, life happens and things don’t always go as planned. Maybe you haven’t found full-time employment yet. Or perhaps you’ve come under some other financial hardship. Or perhaps you’re thinking of going back to school.

Regardless of the reason, if you find yourself unable to make every monthly payment, it might be time to consider a loan deferment.

What Is Student Loan Deferment?

Student loan deferment is the pausing of your loan payments. During a deferment you make no payments, which allows you to focus on paying other bills while you hunt for better employment, go back to school, and so on. But, as is often the case with life, student loan deferment isn’t as cut-and-dried as it sounds.

How Does Student Loan Deferment Work?

Student loan deferments allow you to suspend your loan payments for several months or longer in certain cases. While this sounds great, there are some caveats and qualifiers that come with deferment.

If you have private student loans or unsubsidized federal student loans, you’re looking at interest accruing during the deferment period. This means your interest will continue to build while the payments are paused. If you aren’t at least paying the interest during the deferment period, you’re looking at even larger payments when those student loan payments resume. In other words, your deferment can become costly quite quickly.

If you have subsidized federal student loans, the government will pay the interest that accrues during deferment, making a subsidized loan the more appealing option. College students with subsidized loans already have the interest paid for by the U.S. government while enrolled at least half-time at an eligible college or career school and for an additional six months after leaving school.

Note that to qualify for student loan deferment, your loan cannot be in default. Seek help early if you anticipate any hardship paying your loans, before payments become late or delinquent. Call and talk to your loan provider to go over your options, and continue to make payments until you confirm that your deferment is approved.

Types of Student Loan Deferment

There are certain qualifiers that come with student loan deferment. This means not everyone with student loans is able to pause their payments. To determine if you’re a candidate for deferment, look at the following cases applicable to federal student loans and see if any of them apply to your situation.

Economic hardshipdeferment: You can possibly receive up to 36 months of deferment if your monthly income is less than 150% of the poverty guidelines for your state, you’re volunteering for the Peace Corps, or you’re receiving any kind of federal assistance. This can include SNAP benefits as well as Temporary Assistance for Needy Families.

School deferment: As long as you’re going to school at least half-time, you can qualify for school deferment. This also applies to Parent PLUS Loans being used for a student or dependent in college. There’s no time cutoff for school deferment as long as the student is active. Once the student finishes school, parents have the six-month grace period before their student loan repayments start.

Military deferment: If you’re active duty and your squad is embarking on a military operation or responding to a national emergency, you may qualify for military deferment. This deferment stays active as long as you’re active duty, return to school, or until 13 months after your military service ends.

Unemployment deferment: If you’re currently unemployed you may qualify for unemployment deferment. In order to receive this, you must be getting unemployment benefits, registered with an unemployment agency, and actively looking for full-time work.

In rehabilitation for disability: If you’re in a rehabilitation program for the disabled, you could qualify for disability deferment that lasts for the same period of time as your rehabilitation.

Cancer treatment deferment: Loans often qualify for deferment if you’re currently receiving treatment for an active cancer. Like the disability deferment, this will last for the duration of your treatment in most cases.

While the above criteria typically apply to federal loans, you should also speak with a private lender if you’ve gotten a loan through one. While not all private lenders will be as cut-and-dried as the federal government when it comes to deferment, some will allow custom deferment or forbearance periods if you speak to them and make your case.

Is Forbearance the Same as Student Loan Deferment?

If you’re looking into deferment, you’ll likely see forbearance as an option. On the surface, forbearance operates a lot like student loan deferment — your loan payments are paused for a period, up to 12 months at a time for federal student loans. Unlike deferment, forbearance results in your loan accruing interest no matter what type of student loan you have.

Especially if you qualify for an interest-free break, deferment is the best option. Still, if you’re struggling to make your payments or you have more pressing bills, forbearance can still be a better alternative to falling behind.

Also, unlike deferment, forbearance options are a little more straightforward in that you can often qualify more easily than with deferment, probably because interest charges always accrue, making forbearance more beneficial to the lender.

Although your loan is going to gain interest during deferment or forbearance, this can still be a better alternative to having your credit score take a hit or your wages being garnished — both of which are possibilities if you fall behind on loan payments. One way to avoid the “snowball” effect of compounding interest on your student loans is to keep up with the interest portion even while your loan payments are paused. In either case, speak with your student loan provider before you move forward with deferment or forbearance.

Avoiding Student Loan Deferment or Forbearance

It’s possible you’ve reached a point where deferment or forbearance is your only option. That being said, there are still some tips you can apply to reduce the likelihood of needing deferment or forbearance.

Income-based repayment: If you’re struggling to pay your student loan, you may qualify for income-driven repayment. This process involves tweaking the minimum payment due on your loan to better fit your current income and family size. In some cases, your payment could be reduced to as little as $0. Before you think about forbearance or deferment, income-driven repayments should be your first choice to consider. To learn more, go to the Federal Student Aid site.

Loan refinancing: Refinancing is the act of getting a new loan that ideally has lower interest rates or longer repayment terms to lower your monthly payments. Essentially, you’re swapping out your current loan for a new one, and for federal student loans that means you will also lose the benefits and protections that these offer. Speak to your financial institution or lender first to ensure there aren’t any refinancing costs before you refinance, as these can sometimes outweigh the potentially lower interest rate.

Student loan repayment plan: You may need to go back to the drawing board to determine a new student loan repayment plan like those offered by the federal government. Reassess your finances and speak to a financial adviser about what your options are. Depending on your financial situation, you could be eligible for various repayment programs. Even if there’s no immediate relief available, a financial expert can help you come up with a solid plan to budget and make sure important bills like your mortgage payment or utilities are taken care of first.

Loan forgiveness: In some cases a student loan may qualify for forgiveness. With forgiveness, part or all of a student loan debt is simply forgiven by the federal government. To see if you qualify, you’ll have to fill out the appropriate federal student loan repayment forms.

Building a Healthy Financial Future

When you’re faced with a large amount of student debt, financial wellness can feel much further away than it actually is. But with careful planning you can start building a brighter financial future right now, even if you have student loan debt.

By tackling your student loan debt now, you can start building your credit score — a necessary tool for future purchases like a home, automobile, or even applying for graduate school in some cases.

Deferment and forbearance aren’t ideal, but everyone faces tough times. The systems are there for a reason, so speak to a financial adviser and don’t be afraid to use the resources available to you. It won’t be long before you’re watching your finances level out, your credit score climb up, and your future becoming more stable. Start by investing in yourself today.

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Risa writes on a variety of personal finance topics for Novi Money, with a special expertise in savings, retirement and debt management. She is a CERTIFIED FINANCIAL PLANNER™ and holds an MBA from Darden School of Business at the University of Virginia. Her mission is to help smart people be smart with their money so they can live well and do well.